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Archive for November, 2010

Our game publishing company, Activision Blizzard (ATVI), announced 3Q10 results yesterday that handily surprised to the upside—profits of 12 cents per share vs. the analysts’ consensus expectations of nine cents per share on a non-GAAP basis. But the guidance the company offered for 4Q10 fell short of expectations: profits of 47 cents per share vs. the consensus expectation of 51 cents per share. CEO Bobby Kotick stated, “Our better-than-expected results are due to our leadership in online entertainment, including strong performance from Activision Publishing’s Call of Duty franchise, and Blizzard Entertainment’s World of Warcraft and StarCraft II: Wings of Liberty. For the nine months ending September 30, 2010, our digital offerings contributed close to half of our total non-GAAP net revenues and our digital revenues have increased more than 15% over the prior year.”

Third quarter highlights included:

For the quarter, “Call of Duty” was top-ten franchise both in the USA and Europe

27 July—“Starcraft II: Wings of Liberty” released—the game sold more than one million copies within the first 24 hours of its release, making it the best-selling PC game of 2010, and more than three million copies within the first two months…for the first nine months of the year, Starcraft II was the #1 top-selling PC game…despite being for sale for only the last two of those months.

Well, either you’re closing your eyes
To a situation you do not wish to acknowledge
Or you are not aware of the caliber of disaster indicated
By the presence of a pool table in your community.
Ya got trouble, my friend, right here,
I say, trouble right here in River City.

Thank you, Harold Hill. Yes, indeed, we got trouble, all right.

The economic toilet is still stopped up with unsalable toxic assets that our government in collusion with the banksters that created and peddled them refuse to reprice reasonably, principally derivatives but also mortgages on underwater properties. (They refuse because honestly marking these assets to market would cause several TBTF duckpins to fall into insolvency and make it really hard for them to pay out their bonuses, or deliver their political contributions, to say nothing of being able to offer cushy sinecures to “deserving” former regulators.) Meanwhile, the Fed continues to artificially dampen interest rates and attempt to flush more money into the toilet in order to encourage folks to buy—and thus maintain the fictional value of—overpriced assets. Of course because they refuse to fix the toilet, it is overflowing and the excess dollars are spilling out into China and India and Brazil and most everywhere else, roiling those countries’ economies.

Meantime, our government, amid the first detonations of the baby boomer demographic time bomb, has spent two years pondering the looming entitlements funding chasm and has ultimately decided to increase our commitments via Obamacare. Meanwhile, we are still bleeding money in Iraq and Afghanistan, still running a huge trade deficit, and with unrelenting salvos of anti-small-business bombardments (Obamacare regulations and levies, financial reform regulations, reinstitution of the estate tax, increase of the income tax), have helped to stymie private sector job growth, and real unemployment is stuck around 17%.

And many state governments such as California and Illinois—not to mention national governments such as the PIIGS—face immediate sovereign debt issues more acute than the Feds.

Whoa! Are we going short here, or covering our shorts?

We are covering them. And the reason we are covering them is not because we think things are looking up. We have been short the US equity indices as insurance against a black swan event, and we do not think that the risks there have appreciably narrowed. But the dogged initiatives of the Federal Reserve to maintain higher asset prices have created a new, overriding risk: the risk that the oversupply of dollars will drive the value of the greenback down so effectively that asset prices, while they may not actually increase in absolute value, will increase significantly in nominal dollar value. In other words, the risks of being short equities here in dollar terms now exceeds the upside, because even in the event of a black swan event that depresses asset valuations in real terms, the relative value of those assets as measured in dollars could still increase.

So, while we still believe the efforts of the U.S. government to maintain these overvalued asset prices in the face of market pressure to reprice them at their real value are doomed fail, the risk that the dollar will suffer collateral damage in this inglorious attempt to alter reality has become acute, and accordingly, we are closing these short positions.